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Demonetisation: the good, the bad and the ugly

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By Dipankar Dasgupta

Tax evaders are not the only kind of people who inhabit the world. It is not hard to discover persons who do pay taxes. And apart from these, there is a third low-income category that is tax exempt. The propensities that drive the economic behaviour of the three classes are likely to differ. Yet there is a major similarity that bonds them together. All three groups use money, especially currency, for their daily survival. From where the cash that people carry in their pockets managed to arrive, however, unlike other forms of monetary assets, such as bank deposits, is quite unknown. Hence, cash carrying individuals are probably the softest of targets of those in charge of apprehending the dishonest.
The impact of the demonetisation policy, even though short term, was enormous, in so far as it affected the entire population of this billion plus nation. Hardly any other policy measure carried out in the country had made so many suffer so much for benefits that turned out to be so nebulous. The demonetisation drive may well be likened to a broad spectrum antibiotic administered to an undiagnosed bacteria afflicted patient. Even if the patient survives, the medicine destroys a whole lot of friendly bacteria living in the patient’s body.
Whatever the side effects may be, did demonetisation achieve its primary goal at least? The answer to the question depends on the goal itself. If the idea was to get rid of corruption and convert India into a nation brimming with piety, then demonetisation was a naive policy at best. Post-demonetisation events involving monumental fraud reveal that dishonesty will take a while yet to be weeded out. Nonetheless, viewing matters non-politically at least, the government may still be complimented for trying to achieve a romantic but worthwhile goal.
What went wrong? The professor, Arun Kumar, a noted expert on the black money problem, argues that only 1 per cent of black wealth is stored as cash. That is, even if evaded tax accrues initially as cash, such accruals swiftly metamorphose into other forms of wealth, such as real estate. Is it possible then that we were barking up the wrong tree?
It appears from the latest Reserve Bank of India report that the high denomination cash that the government had targeted, be it black or no, failed to disappear from the economy. Let us try and understand this more transparently and begin with cash at the very source of cash, otherwise referred to as the Reserve Bank of India. The RBI’s balance sheet, like all other balance sheets, has two sides to it, called respectively assets and liabilities. The assets consist of government bonds, foreign exchange, gold and a whole lot of other valuables. The liabilities are incurred by the bank on the basis of the assets it owns. For example, if the RBI holds $1 worth of foreign exchange, it may, if it pleases, issue rupee denominated cash liability of equal value. In fact, when a person purchases foreign exchange, he surrenders back an equivalent quantum of rupees created by the RBI. In the process, both the assets and the liabilities held by the bank go down by the same amount in value terms. Put differently, total assets of the central bank and its total liabilities must always be exactly equal. In accountancy language, this is referred to as double entry book-keeping.
What happens to the asset-liability balance when a government decree divests a major part of the cash created by the RBI of its legal tender status? Clearly, liabilities of the RBI go down overnight (as it literally did in late 2016), even as its aggregate assets remain unchanged. The principle of double entry book-keeping requires, however, that total assets and liabilities match. If therefore, the presumed black money hoarders fail to deposit back their cash to the banks and hence to the RBI (that is, if the cash vanishes away from the economy), the central bank ends up with assets exceeding its liabilities. The vanished cash is no longer its liability. The only way the hiatus can be removed is through the creation of new cash. To whose accounts will this new cash be credited? Surely not the accounts belonging to black money creators. The only organization that is ideally placed to benefit from the new cash is the law keeper itself that is the government (though it has been said that the route through which this can happen is not legally straightforward).
If the tax-evaded cash were to so transform into spendable funds of the government, yet another possible objective of the demonetisation drive should be fulfilled. A government that is deprived of its tax revenue finds it difficult to address development programmes. Demonetisation could well have been conceived as an indirect means for making the avoided taxes flow back to where they should have actually accumulated. In spite of the (short term) hardships inflicted on millions of innocent people, this goal could have been well worth reaching. Unfortunately, as the latest RBI report has revealed, that goal too turned into a chimera. Of the banned notes, 99.3 per cent has been deposited back into the system.
It does not require too much imagination to figure out that a good part of the notes deposited back were associated with the so-called black economy. To that extent, it is incorrect to say as yet that the government has failed in its mission. But it has only made its mission enormously more difficult. In its effort to climb the Everest, it has ended up with setting before itself the unenviable task of reaching the moon.
The department of direct taxes, one hears, is now engaged in following through all large deposits to the banks following demonetisation. It is not clear that the department is equipped with sufficient manpower and infrastructure to carry out the exercise. In fact, if it did possess such mind-boggling facilities, the black economy was unlikely to have existed at all. Tax authorities have been hoodwinked not merely during the present government’s tenure, but ever since time began.
Demonetisation had other objectives too, as the government has declared on occasion. One of these was to eliminate, as far as possible, cash-based transactions. The RBI report suggests that this objective, too, has probably not been achieved. As noted in the media, “19 months after the government banned… notes which made over half of the cash in the economy redundant, the currency with the public has more than doubled from a low of nearly Rs 7.8 lakh crore it had hit” following the demonetisation decision. In fact, currency with the public exceeds now its level prior to the demonetisation announcement. And amongst other interesting findings reported by the RBI, household savings held in the form of currency have reached their highest level since 2011.
Even if the wisdom underlying demonetisation is yet to be clearly detected, it’s best to conclude with a hopeful note. Being an economist who shies away from politics, this columnist wishes to believe that all is not lost. Policy design is no easy task. A particular policy may have failed to reach its objective, but nothing is permanent in this world.

 

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Opinion

Congress Making It Easier for Modi

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By Prem Shankar Jha

Prime Minister Modi has convinced most of the political class that he has turned the tragedy at Pulwama into a great military and diplomatic victory against Pakistan. As a result, many of those who are in politics only to line their pockets are seriously considering jumping on to the BJP boat even at this late hour. Do they not realise that everything Modi has done since February 14 is pure theatre – whose only purpose is to somehow win an election he was destined to lose because of the amateurish performance of his government, its scant respect for the rule of law and the coming together of the opposition?
In 2014, the BJP came to power because its vote share jumped 13 percentage points from 18% to 31%. This happened because a large part of the electorate, which had seen growth slacken sharply in 2011, believed his grandiose promise to bring back “acche din”. i.e revive economic growth, and create millions of jobs. Instead, all he has created in the past five years is a factory for the suppression or falsification of economic data.
What he has not been able to suppress or misrepresent is the near-complete absence of new jobs, the loss of 11 million jobs in industry, and further millions in construction, and the rise of the totally unemployed, to 6.2% of the workforce – the highest level in 45 years.
The spreading disillusionment had already been reflected in a string of defeats in recent assembly elections and bye-elections, Modi knew that the BJP could not possibly win on its own, so he turned to that “last refuge of the scoundrel”, patriotism. Pulwama gave him the opportunity he was looking for and he has taken full advantage of it – with a ruthlessness that is strongly reminiscent of his opportunism after the Gujarat riots of 2002.
The irony, which the big media won’t focus attention on, is that the government had received no fewer than three warnings from the Intelligence Bureau and a more detailed one from the Kashmir police warning of the threat of an imminent attack. The golden rule in intelligence analysis all over the world is that for a piece of information to be taken seriously it must be obtained from two independent sources. The pre-Pulwama warning passed the test.
The CRPF brass, presumably, took the threats seriously, and asked for its jawans to be transported by air instead of sending them by road. It may have also suggested this because heavy snowfall had forced a bunching up of two convoys and was certain to slow their movement to a crawl. But the fact remains that it made the request, and the request was denied.
Who had the power to deny such a request? In such an important matter, it is unlikely that the Ministry of Home Affairs would have declined on its own. What is more, had it actually done so, the air would have been full of recrimination and denials in the days that followed. But a full month later, there has been only silence. So it is beyond reasonable doubt that the request was denied by the PMO. And that means Modi. Why he would do that, only knows.
This is not the first time Modi has tried to turn mass death into political advantage. Modi was able to use the Godhra fire tragedy and the orchestrated massacres which followed to advance the Gujarat elections by four months, win it and remain the chief minister of Gujarat for the next 12 years. It would have been against his nature not to seize the ‘opportunity’ that the death of CRPF jawans would give him.
Everything that has happened since then has been excellently choreographed theatre. First, Modi promised a ‘surgical strike ‘ in retaliation. That took place 12 days later on February 26. Within hours of the IAF attack on Balakot in Pakistan, which the Indian foreign secretary said had wiped out a key Jaish-e-Mohammad training camp, BJP ministers put out the claim that 300 to 400 terrorists had been killed. Since then, satellite imagery and explosive analysis suggests that the madrassa at Balakot is not only standing, but might have suffered very little damage, and that any casualties would have been far fewer than the political claims being bandied about. The air force itself said it would be “premature” to say how many people had been killed in the airstrike.
Satellite imagery apart, the most credible evidence has come over the phone from what a student at the madrassa told NirupamaSubramaniam, the highly respected journalist who used to be correspondent of The Hindu in Islamabad and is now with the Indian Express. He said that a ‘huge’ bomb had fallen close to the madrassa, after which the army had hastily evacuated the students to safe locations elsewhere.
But one does not have to choose between conflicting second hand reports and satellite analysis to arrive at this conclusion. The clinching proof is not even Pakistan Prime Minister Imran Khan’s assertion that there had been no casualties, but in where he made it. For this was in Pakistan’s National Assembly. Since Balakot is in Khyber-Pukhtunkhwa, is it credible that an MNA from the area would not have stood up, challenged his statement, named some of the dead and accused him of being a coward who did not want to confront India? No elected prime minister can take such a risk, and that is doubly so in Pakistan.
So if no one was killed, was it because the Indian Air Force is so monumentally inept that it missed a stationary target ­– a large complex – with not one but four precision-guided bombs? Since this idea strains credibility to the extreme, only one explanation remains: that the attacks were intended to miss.
This is the only hypothesis that explains two other anomalies: the first is US President Donald Trump’s curious statement a day earlier that he believed India would launch a reprisal attack and he would ‘understand’ if it did. The second is the care the Pakistan Air Force took not to cross the LoC in its retaliatory strike, and to attack only uninhabited sites ‘in order to show the PAF’s capability’. It is not beyond the realms of possibility that the US helped to orchestrate the two reactions in order to ensure that the conflict did not spill over into war.
From Modi’s point of view, therefore, the entire operation has been a monumental success. But for the nation, it is an unmitigated disaster. Yet, sceptics may ask, does one swallow a summer make? No, but the air strike was only the last of several other swallows. Another is the hue and cry that Modi has made over the declaration of Masood Azhar as an international terrorist. Modi tried to do this before the UN Security Council met on Pulwama, but failed. In fact, the UNSC resolution did not even condemn the Jaish-e Mohammad directly, but only acknowledged that it had claimed responsibility. Modi brought the listing matter up again after the tit-for-tat airstrikes and, predictably, China again vetoed it.
Azhar richly deserves to be both named and sanctioned, and the Chinese refusal is a blatantly immoral act born out of the basest form of realpolitik. But how much importance should India attach to a purely symbolic declaration that will change absolutely nothing on the ground? For Masood Azhar has shown no desire to travel abroad since his return to Pakistan in 2000. So the ban means nothing to him, or to Islamabad. What will India gain from such a declaration? The answer is ‘nothing’. But Modi’sself image as a lohpurush would gain a great deal. That is what he has been willing to endanger India’s relations with its most powerful neighbour for. The brinkmanship this involves is in many ways even more irresponsible than what he has shown over Pulwama.
What would have happened if the IAF’s bombs had actually killed 300 students inside the madrasa, whether he was training to be a jihadi, or was simply the son of a poor man who could not afford to pay the fees for a regular school? Would Pakistan then have responded with four attacks on vacant land in POK? And if it had done more, how long would it have been before the conflict escalated? This is the kind of risk that Modi was willing to run in his ruthless campaign to get re-elected, yet the Congress is unable to point this out to the people.
Today, the only sure way to prevent the Sanghparivar from returning to power is for the Congress to maintain a solid front with the opposition and establish a commonly agreed set of criteria for the allocation of seats among alliance partners. In the Congress, the main opposition to this common-sense strategy is coming from the local cadres whose capacity to raise money on the pretext of meeting election expenses and promising favours to donors in return, will vanish the moment their constituency is given to another party. This thinking is threatening to create three-cornered contests in UP, Delhi, MP, Bihar and other states, which could end by bringing the BJP back to power.
The only person who can overturn this suicidal strategy is Rahul Gandhi. It is time he brought his party back under his control. If the Congress is exposed as having only 5% of the vote in Delhi, and 8-10% in Uttar Pradesh, and is responsible for the failure of the mahagatbandhan, this will not only end the hold of the Nehru family over the party but also destroy its cadres’ standing in their constituencies.

 
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How did Pulwama happen?

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By T K Arun

Speaking at the 80th raising day of the Central Reserve Police Force (CRPF), National Security Adviser AjitDoval said that the nation’s leadership is capable of reacting to any terror attack, and will decide if the retaliation should target terrorists or those who control them. That is very well, but what about preventing another attack?
When a suicide bomber drove a vehicle laden with some 300 kg of explosives into a convoy of CRPF personnel at Pulwama, the result was tragedy. Over 40 security men were killed, several more wounded. The immediate reaction was sorrow, anger and outrage. The attack was claimed by the Pakistan-based Jaish-e-Mohammed (JeM), headed by Masood Azhar. In retaliation, the government sent Indian warplanes into Pakistani territory and bombed targets there.
The response was powerful, justified and recognised as such by most global powers. Pakistan came under immense pressure to release the Indian fighter pilot it had shot down and captured. India won diplomatic support for putting Masood Azhar on the UN’s sanctions list from most countries, save China.
The general reaction in India was one of jubilation at breaking free from Pakistan’s nuclear thrall. Prime Minister NarendraModi who dared to take the decision to use air power, even if only for a “pre-emptive, non-military” strike, basked in the glow of public approval. But, in the process, one vital question has been left to blow forlornly in the wind: why and how did Pulwama happen? When military men die, the popular response is one of grief and admiration for their heroism. Rarely do people ask whether those deaths were necessary.
Not though the soldier knew someone had blundered. Theirs not to make reply, Theirs not to reason why, Theirs but to do and die/ Into the valley of death/ Rode the six hundred. The Charge of the Light Brigade evokes awe of military bravery and sacrifice, but it also deplores blundered loss of life.
The mid-19th century Crimean war, in which a traditional British light cavalry brigade charged a deployment of Russian cannon, providing Alfred Tennyson with the material for his poem, caused so much needless loss of life and treasure that the resultant public outcry led to professionalization of the British army and the conduct of war.
In India, the death of brave soldiers provokes similar awe at their bravery and sacrifice. But the needed follow-through of professionalization of conduct in matters of war and security just does not happen.
The Pathankot Air Force Station was attacked in January 2016. Six soldiers were killed. India handed over proof to Islamabad of their non-State actors’ involvement in the attack, even invited their people to investigate the crime scene. Deadpan, Pakistani investigators declared that India had stage-managed the attack to malign Pakistan.
Six months later, an army brigade headquarters at Uri was attacked. It left 19 soldiers dead. India performed its surgical strikes on terror launch pads across the Line of Control and declared vindication.
Two months later, terrorists attacked an army base at Nagrota, killing seven Indian soldiers. Evidently, the surgical strikes were more effective in spawning Bollywood josh than in preventing further attacks.
After the Pulwama attack and India’s counter-attack, the National Security Adviser is again threatening retaliation for fresh attacks. Could we have some serious thought on how to prevent such attacks, foiling incipient attacks through intelligence that lives up to its name and pre-emptive action?
If we value the lives of our soldiers, we must focus on preventing such attacks, not revelling in our ability to strike back when a fresh attack happens. For that, fresh attacks must be recognised as security failures on the part of the government that cannot be offset by any subsequent show of force.
Nor is this failure at the level of policing and intelligence gathering alone. Essentially, the failure is that of politics, failure to live up to the promise and challenge of democracy. It is now commonplace for an encounter in Kashmir between India’s armed forces and separatist militants to draw a local crowd of protesters, who seek to shield the militants and help them escape. Some of these civilians end up as collateral damage. Every civilian death breeds yet more alienation and yet more militants.
One such young man drove a carload of explosives into the CRPF convoy at Pulwama.
For far too long has India sent its security forces to wage war against its own people in Kashmir, the northeast, the tribal plains and jungles of Jharkhand and Chhattisgarh. This strategy has produced alienation and discontent, propelling the conflict forward from one generation to the next. Soldiers have been killed, as well as civilians and rebels. This strategy must be abandoned.
India’s biggest strength is democracy. Democracy must be the means to resolve separatist conflict and rebellion. Brandishing the sword of retribution serves not to deter fresh attacks, but to whip up nationalist frenzy. That is not the way to honour the dead.
(Economic Times)

 
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Leaders must draw from NZ PM’s courage

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By Gopal krishna Gandhi

Wisdom in tranquillity, like courage under pressure, is admirable. But not unknown. But wisdom and courage, both, being displayed in a situation of unprecedented tension, are exceptional. If a Nobel Prize for Peace could be given to a spontaneous statement for wisdom and courage, rather to a person, New Zealand’s Prime Minister JacindaArdern deserves it. The words spoken by her after the terror attack in Christchurch were few. They are unforgettable. One single, three word sentence, the most so. Referring to the 49 or more killed, she said: “They are us”. Not “they are one of us”, or “they could have been you or me”. None of that cautious, self-insulating, self-indemnifying vagueness. Simply, they are us.
Those learned in Sanskrit scripture would call this pure Advaita, captured in RamanaMaharshi’s way of looking at things in the term “I am Thou”, captured by the Indian philosopher Ramchandra Gandhi for the eponymous title-theme of his extraordinary book. If at one level Ardern gave us a metaphysical statement, at another level she also gave us, spontaneously, a highly practical political philosophy that is critical to human survival today.
Reversing the “us” and “them” binary, throwing old concepts of otherness out of the window, giving no space to either cliché or platitude, she then said “…the person who perpetuated this violence is not”. The significance of both statements is mutual, colossal.
Almost all the targeted victims were Muslim, the attacker or attackers, white and Christian just like Ardern is. In saying that the terrorist or terrorists behind the attack may have been from New Zealand’s majority community but they do not represent it, cannot represent it, for they have done something inhuman, something that goes against civilisation, she said something that each New Zealander needs to know. She could have said she was grieved, agonised, appalled. She could have said ,as the head of government, as one who has to maintain order and uphold law, that she was horrified, angry, in righteous fury. And that would have been considered right, termed appropriate. But no, Ardern spoke from a thinking heart and feeling mind to say something that was totally different, totally timely and timeless. The perpetrators of terror are the aberration, she conveyed, the anomaly, the deviation, divergence from civility, from humanity that places them in a universal not one of us-ness. She made a difference, drew a line that was not about ethnicity but human decency. And then, in an amazingly topical observation for a world that is closing its eyes and shutting its doors to immigrants and refugees, she said, and I quote her exact words, “Many of those who will have been directly affected by this shooting may be migrants to New Zealand, they may even be refugees here. They have chosen to make New Zealand their home and it is their home. They are us.”
And in so doing, she said something that philosophers in positions of statesmanship have, like the emperor Asoka did, for their times and for all time. Being the other, being migrants, refugees, immigration or asylum seekers, being in a minority, being different, being isolated, bereft, in other words, being orphaned, is a condition that can be ours, yours or mine, at any time anywhere.
On the subcontinent of India, in South Asia, the condition is endemic. Each one of us is, in the next mohalla, a potential other.
A Christchurch-like mosque or temple exists in every city, town and village in India and can be the scene of terror attacks, exactly like the mosques in Christchurch. And since Hindus and Muslims and Sikhs now inhabit places outside India in large numbers, Christchurch repeats can happen anywhere, across the globe. What will be the effect? Perpetual revenge, retribution, vengeance. Perpetual , mutually sustaining hatred.
If extremists practising their macabre method under the name of Islam now wreak vengeance on churches and chapels with Christian congregations at prayer, the world will not have a day of peace, its religions no freedom from tension, fear, hate. No immigrant anywhere outside South Asia , whether Hindu or Muslim or Sikh will then feel secure. Nor Christians, of an ethnicity same or similar to that of Christchurch’s mass murderer.
India’s leaders have to draw from Prime Minister Ardern a lesson in spontaneously courageous wisdom or wise courage to say that victims of violence are us, and no perpetrator of violence is us. More specifically, that migrants and refugees seeking shelter in India from ethnic prosecution are in their own home. Non-refoulement could not have been defined better than in JacindaArdern’s words.
The darkness of that massacre has met the only light that can dispel it.

 
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